Economies of Scale and Merger Efficiencies: Empirical Evidence from the Chilean Pension Funds Market
AbstractOver the last twenty years there has been a deep concentration process in the Pension Fund Manager (AFPs) industry in Chile (from 21 firms in 1994 to only 6 in 2012). A major concern with the concentration of this industry is that firms might be able to exercise market power. However, significant efficiency gains could result from this concentration process, especially if there are economies of scale present in the industry. The welfare effect of a merger is, therefore, ambiguous. In this paper we estimate the welfare implications of a merger between two medium-sized AFPs in Chile. For this purpose, we estimate the size of the economies of scale in this industry and use the results to simulate the merger using a simple imperfect competition model. The estimations, based on quarterly financial information for the last 8 years of the Chilean Pension Funds system, show robustly the presence of significant economies of scale in operating costs. The merger simulation indicates that despite the cost savings, the merger would induce a small price increase. This effect reduces consumer welfare, but aggregate welfare increases because of the efficiency gains from the economies of scale. Since aggregate elasticity in this industry is zero (because affiliation is compulsory), the price increase does not generate any efficiency loss.
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Bibliographic InfoPaper provided by Adolfo Ibáñez University, School of Government in its series Working Papers with number wp_027.
Date of creation: Dec 2012
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- Claudio Agostini & Eduardo Saavedra & Manuel Willington, 2012. "Economies of Scale and Merger Efficiencies: Empirical Evidence from the Chilean Pension Funds Market," ILADES-Georgetown University Working Papers inv285, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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